Price Antidilution Protection
Price Anti Dilution Protection is a mechanism designed to shield investors from potential losses by adjusting the Conversion Ratio of Preferred Stock in case the company issues new shares at a price lower than the initial investment. This adjustment ensures a fair balance between investor interests and subsequent valuation changes.
What it Means:
Price Anti Dilution Protection acts as a safeguard, preventing investors from facing undue dilution if the company opts for a lower-priced stock issuance in subsequent funding rounds.
How to Calculate:
There are two primary types of Price Anti Dilution Protection - Full Ratchet and Weighted Average (Broad Based or Narrow Based). The calculation involves adjusting the Conversion Ratio to align with the new, lower stock price, preserving the investors' stake.
Why Measure:
Measuring Price Anti Dilution Protection is crucial for both founders and investors. It ensures fairness in valuation adjustments and fosters trust in the investment landscape, encouraging sustained collaboration and financial growth.
Examples:
Imagine an Indian startup with an initial investor who purchased Preferred Stock at INR 150 per share. Subsequently, the company issues new shares at INR 120 per share in a later funding round. With Price Anti Dilution Protection, the Conversion Ratio is adjusted to compensate, maintaining equitable ownership.
Understanding and implementing Price Anti Dilution Protection in Indian startups fortify investor confidence, promoting a robust and secure investment environment.